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Boeing's Bid Bites Back

Its KC-X contract is set to cost them $300 million.

I knew it was going to be bad for Boeing(NYSE: BA). Little did I suspect just how bad.

When Boeing beat out EADS for the right to build the KC-X military refueling tanker in March, investors cheered the victory. EADS had given 'em a run for their money, soldiering on even after Northrop Grumman(NYSE: NOC) decided to call it quits. But in the end, Boeing provided the Air Force a "better bargain" than EADS could afford. A great plane, and great price, and a great big win for U.S. taxpayers. But that price posed a problem ...

A "very, very, very aggressive" bidThat's how EADS North America Chairman Ralph Crosby described Boeing's offer to build 179 KC-76 refueling tankers for the Air Force for just $31.5 billion in total. In offering a lowball price, Boeing undercut EADS's offer by a cool $3.5 billion. But as I pointed out at the time, "Boeing also cut its profit margin to the bone."

Analysts at the time predicted that even with everyone from Boeing's machinists union to its engineers to its subcontractors Spirit AeroSystems(NYSE: SPR), Rockwell Collins(NYSE: COL), United Technologies(NYSE: UTX), and Honeywell(NYSE: HON) working together to help cut costs, Boeing would earn only a "relatively thin" profit margin on the project. Turns out, it won't even earn that. Last week, Boeing confirmed pessimists' worst fears about KC-X: It's going to be a money-loser for Boeing.

A bid too farAccording to Air Force officials, Boeing's now on track to overrun its cost estimates on KC-X by at least $300 million -- and that's just on the first installment of 18 tankers (due for delivery by September 2017.) There's still 161 more tankers to build after the first tranche touches down.

To be crystal clear: The U.S. government is going to pay Boeing $4.9 billion to buy 18 tankers, but it will cost Boeing $5.2 billion to build them. Now admittedly, Boeing reassures investors that "we are not there yet. It's a projection." But if you run-rate this "projected" loss out over the entire 179 plane complement, it seems there's a very real risk Boeing could lose as much as $3 billion on the entire contract.

It makes a Fool wonder: If this is what it looks like when Boeing wins a contract, maybe next time investors should root for them to lose.

Fool contributorRich Smithholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Northrop Grumman.Motley Fool newsletter serviceshave recommended buying shares of Spirit AeroSystems Holdings.

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I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.